Considerations when rolling over your 401K into a business

Risks Involved

Employing your 401(k) to finance your start-up venture comes with some pretty high risks. We’ve outlined some of the most obvious risks below to help you make a well-informed decision. Before we know continue, know this… Many business and franchises have been started using 401K rollover financing. Despite the commonness and acceptance of this financing options, their are risks you should consider.

Risking your hard earned retirement

The biggest risk comes from the idea itself. You will be utilizing money have saved up for retirement to a new business, which may or may not take off. Depending on how much of your retirement you have invested in the venture, you’ll be left in a considerably difficult position financially if things go sideways.

You control the amount

The procedure allows you to invest as much or as little of your retirement funds as you wish, but as with any new business, putting it all in will be a risky move so it will be a wise consideration to decide how much you should invest so as to have finance to fall back on if things don’t go as planned.

SBA Express + 401k Rollover?

If using your entire 401k to finance your business scares you, and it should, consider borrowing part of the money with the SBA Express Loan program. You can borrow as much as 150K without risking personal assets such as your home or retirement funds.

What is the business worth?

Apart from the most obvious business risk outlined above, this procedure comes with some other exclusive risks as well.
An important consideration before you use your retirement funds to acquire a new business is it ensure it is valued adequately. Investing a large amount of the funds in a business that is revealed to be unprofitable may incur substantial penalty fees and recognition of income may be required, regardless of the fact that it’s you whose finance got sunk.

What about a franchise?

To play it safe, a lot of individuals adopting this procedure find it a good option to invest the funds to purchase a franchise. Doing so and investing in a business that has an established goodwill and can be easily valued is safer than investing in a new business with various uncertainties.

Managing your investment

Since you’d be working for yourself, you also need to consider the risks that come with paying yourself your own salary. An important one amongst them is a failure of compliance to IRS regulations. Since you would have a C corporation established for this procedure to work, as with any corporation, the IRS will expect you to issue dividends which if you fail to do, while paying a hefty salary to yourself is going to attract the IRS’ attention.
They’re not the only thing you need to consider; you could be risk to your investment as well. It’s very easy to get carried away when you’re paying your own salary and eat away at your 401(k) investment.
The way to diminish this risk is to be patient and not use the funds that you’ve invested in the business to pay your salary, but to pay it with revenues that the business generates, which may take a while, but is the safer option. It is also advisable to hire an accountant or seek advice from a business counselor to find out how much a person in your line of work and in your geographical location should be paying themselves.

Should you be dipping your toes in it?

Setting up a new business, any business is not for anyone who isn’t ready to face the risks the come with a start-up and will give up at the first sign of trouble. Especially financing the business with your savings is exceptionally risky and you should get into it only if you’re confident and have had previous business experience.
Having previous business experience isn’t essential, but getting into a new business with prior experience is always advisable, and the more experience you have, the better it is. If you’re someone with not prior business experience, employing services of a trusted investment advisor may help.
It isn’t surprising why such an investment will interest a number of people, especially in today’s economic climate where a lot of business-minded people are unemployed and acquiring a start-up loan could be a complicated, difficult, or even an impossible process. Using your 401(k) funds as an investment gives you complete control over the money, but it also means that you’re putting your future in dire uncertainty so make sure you’ve talked to advisor, friends, and other people with experience to make an educated decision.